In this proposal, I develop a new approach for studying children's developing understanding of reality, a topic with a long history that continues to intrigue and perplex developmental psychologists. Knowledge about how children evaluate new information and make proper assignment of entities to real and not-real categories is especially critical in the media rich age in which we live. Young children are bombarded with information and images offering a mix of the real and the fantastical: Elmo, a monster, teaches children about science, and Harry Potter, a human child, performs magic spells. Amidst this, children continuously encounter novel entities and events, and must assign these entities and events to their proper (real or not real) categories. The goal of the proposed studies is to explore how children make reality status judgments when they encounter novel information. Although previous research addresses the ages at which children make various reality-nonreality distinctions, there is little information on the factors that affect children's assignment of entities to real and not-real categories. I propose to investigate the effects of three broad classes of factors: (1) characteristics of the individual child (e.g., age) that may affect decisions regarding the reality status of novel entities, (2) characteristics of the stimulus that may affect decisions about reality status (e.g. internal consistency of the attributes), and (3) effects of environment (e.g., the context in which children encounter a novel entity). Information from the studies will be used to formulate a model of the processes by which children make reality status judgments. The proposed research should greatly advance knowledge of the cognitive development of young children aged 3 to 7. It is imperative that children be taught to think critically about new information. To do this, researchers and educators must first understand how children identify and separate real from unreal. The findings of the proposed studies will potentially have important implications for preschool and elementary education, parenting, and clinical practice with young children.